How Singapore Acquired Control of Four U.S. Resorts

The Arizona Biltmore hotel in Phoenix was awarded the ULI Heritage Award in 1997 for architectural integrity, landscaping, and hiqh-quality service. (Arizona Biltmore)

Perhaps nothing illustrates the lofty peak and precipitous fall of the U.S. destination resort sector as starkly as the long-running, complex saga that ultimately put a quartet of household-name properties under the control of Singapore’s deep-pocketed sovereign wealth fund.

The story culminated earlier last year with Government of Singapore Investment Corp. (GIC) taking control through a $1.5 billion bankruptcy court–administered transaction. Arguably, the story began with a $1 billion “single-borrower” commercial mortgage–backed securities (CMBS) issue when Wall Street’s conduit lenders were gunning full bore in 2006.

The bond deal securitized a senior mortgage against five high-profile resorts totaling nearly 3,300 rooms that were owned by CNL Hotels & Resorts at the time: the 780-room Grand Wailea Resort Hotel and Spa in Hawaii; the 796-room La Quinta Resort and Club and the PGA West golf course in La Quinta, California; the 740-room Arizona Biltmore Resort and Spa in Phoenix; the 692-room Doral Hotel & Country Club in Miami; and the 279-room Claremont Resort & Spa in Berkeley, California.

Then in 2007, as Ashford Hospitality Trust was purchasing more than 50 properties from CNL, it flipped eight resorts—including the five securing the CMBS bonds—to Morgan Stanley’s real estate funds management operation in a $3.1 billion transaction. Morgan Stanley, in turn, sold a $300 million stake in the eight properties to the California State Teachers’ Retirement System.

A couple of years later, as resort revenues were hammered by the Great Recession, the loan was transferred to special servicing as Morgan Stanley sought to modify terms in order to continue servicing the debt under the portfolio’s deteriorated financial picture. However, it was holders of $800 million of subordinate debt who ended up briefly taking control of the five properties subject to the securitized mortgage—after foreclosing on the collateral and converting the debt into equity.

But this group, which included Paulson & Co., Winthrop Realty Trust, and Capital Trust, was not able to hold on, either. In early 2011, it sought protection in the U.S. Bankruptcy Court’s Manhattan district from foreclosure-minded creditors holding another $1.5 billion in secured debt—including the CMBS issue’s trust that still held some $850 million that, by that time, had matured.

To reduce the bankruptcy estate’s liabilities, the court subsequently approved the sale of the Doral resort to a group headed by Donald Trump in a $150 million transaction that closed about a year after the bankruptcy filing.

But it was ultimately Singapore’s GIC, which by then had come to hold some $360 million in subordinate mezzanine debt, that emerged as the owner of the remaining four resorts. The reorganization plan that GIC Real Estate proposed essentially amounted to a court-supervised auction, and entailed having the sovereign wealth fund infuse more than $1.1 billion in additional hard equity to satisfy the CMBS bondholders and other secured creditors.

Interest rates have been on a roller-coaster ride over the last year, but cap rates are largely unchanged. The result of these moves is that cap rate spreads relative to the safe investments in the 10-year U.S. Treasury bonds have moved back to the levels seen in 2017. Given everything that has changed over the last year—as well as everything that has not—there may be room for cap rate spreads to move lower.

At the 2019 ULI U.K. National Conference, a panel on the practicalities of real estate investment reflected on the opportunities and challenges, not least in terms of the impact that Brexit is having on investor sentiment, as well as where we are in the market cycle. Multifamily continues to do well, while retail is struggling as in overbuilt markets.